An Empirical Analysis of the Relationship between Minimum Wage, Investment and Economic Growth in Ghana
DOI:
https://doi.org/10.61538/ajer.v3i2.473Abstract
The paper determines whether minimum wage stimulates economic growth in Ghana, for the period 1984-2013, using autoregressive distributed lag (ARDL) bounds testing approach to cointegration, within an error correction framework. A preliminary test provides evidence of correlation between minimum wage and investment, thereby allowing for an examination of the wage-growth relationship. Four equations are used to determine the relationship between minimum wage and economic growth. The results from the simple regression of minimum wage on economic growth indicate a positive and statistically significant impact of minimum wage on economic growth both in the long-and short-run. However, the results from other estimations of the wage-growth relationship when investment, credit to the private sector and an interaction term of wage and investment are controlled for precludes any naïve policy formulation which may be solely based on the positive wage-growth relationship obtained. Specifically, the results from the other estimations imply minimum wage can only be growth enhancing if it is met by simultaneous increases in investment spending, as well as deliberate and sustained policies aimed at ensuring credit to finance private investment are readily available, easily accessible, and affordable. In addition, the ratio of public investment to tax revenue must increase as minimum wage increases since such complementary changes are more likely to lead to economic growth.References
Asteriou D. and Hall G.S. (2011) Applied Econometrics. 2nd Edition, Palgrave Macmillan.
Baumol W. (1967) “Productivity Growth, Convergence and Welfareâ€. American Economic Review, 76. pp. 1072-85.
Card D. and Krueger A.B. (1995) Myth and Measurement; the Economics of the Minimum Wage. Princeton University Press: Princeton.
Clemens, J., and Wither, M. (2014) “The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workersâ€. (No. w20724), National Bureau of Economic Research.
Cukierman A., Rama M., and Ours J.V. (2001) “Long-run Growth, the Minimum Wage and other Labor Market Institutionsâ€. Centre for Economic Research, Tilburg University.
Dube A. (2013) “Minimum Wages and Aggregate Job Growth: Causal Effect or Statistical
Abstractâ€. IZA DP No. 7674.
Enders W. (2004) Applied Econometric Time Series. Second ed. Wiley, New York.
Engle R. F., and Granger C. W. (1987) “Co-integration and Error Correction: Representation, Estimation, and Testingâ€. Econometrica: journal of the Econometric Society. pp. 251-276.
Fanti L., and Gori L. (2011) “On Economic Growth and Minimum Wagesâ€. Munich Personal RePec Archive, MPRA Paper No. 25842.
Freeman R.B. (2000) “Single Peaked vs. Diversified Capitalism: The Relation Between Economic Institutions and Outcomesâ€. NBER Working Paper 7556.
Garrett, G. (2001) “Globalization and Government Spending around the Worldâ€. Studies in Comparative International Development, 35(4). pp. 3-29.
ISSER (2013) Policies and Options for Ghana’s Economic Development. Legon: Institute of Statistical, Social and Economic Research, University of Ghana.
Johansen S. (1995) “Likelihood-based Inference in Cointegrated Vector Autoregressive Modelsâ€. OUP Catalogue.
Johansen S. and Juselius, K. (1990) “Maximum Likelihood Estimation and Inferences on
Cointegration—with Applications to the Demand for Moneyâ€. Oxford Bulletin of Economics and Statistics, 52. pp. 169–210.
Johansen, S. (1991) “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Modelsâ€. Econometrica: Journal of the Econometric Society. pp. 1551-1580. Lemos S. (2004) “The Effect of the Minimum Wages on Pricesâ€. IZA DP No. 1072.
Lustig N. and McLeod D. (1996) “Minimum Wages and Poverty in Developing Countries:
Some Empirical Evidenceâ€. Brookings Discussion Papers in International Economics, No.125. Magruder, J. R. (2013) “Can Minimum Wages Cause a Big Push? Evidence from Indonesiaâ€. Journal of Development Economics, 100(1). pp. 48-62. Neumark D. (2014) “Employment Effects of Minimum Wagesâ€. IZA World of Labor 2014:6.
Ofori-Abebrese, G. (2012) “A Co-Integration Analysis of Growth in Government Expenditure in Ghanaâ€. Journal of African Development, 14(1). pp. 47-61.
Park J.Y. (1990) “Testing for Unit Root and Cointegration by Variable Additionâ€. Advances in Econometrics, 8. pp. 107-133.
Pesaran M. H., Shin, Y., and Smith, R. J. (2001) “Bounds Testing Approaches to the Analysis of Level Relationshipsâ€. Journal of Applied Econometrics, 16(February 1999). pp. 289–326.
Phillips P. C. B., and Ouliaris S. (1990) “Asymptotic Properties of Residual based Tests for Cointegrationâ€. Econometrica: Journal of the Econometric Society, pp. 165-193.
Phillips P.C.B. and Ouliaris S. (1988) “Testing for Cointegration Using Principal Components Methodsâ€. Journal of Economic Dynamics and Control, 12, 205-230.
Sabia J.J. (2014) “Minimum Wages: A Poor Way to Reduce Povertyâ€. CATO Institute, Tax and Budget Bulletin. No. 70.
Saikkonen P. (1992) “Estimation and Testing of Cointegrated Systems by an Autoregressive Approximation’. Econometric Theory, 8, 1-27.
Shin Y. (1994) “A Residual-based Test of the Null of Cointegration against the Alternative of No Cointegrationâ€. Econometric Theory, 10(01). pp. 91-115.
Stock J.H. and Watson M.W. (1988) “Testing for Common Trendsâ€. Journal of the American Statistical Association, 83 pp. 1097-1107.
Stock, J. H., and Watson, M. W. (1993) “A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systemsâ€. Econometrica: Journal of the Econometric Society, 783-820.
Taylor J. and Selgin G. (1999) “By our Bootstraps: Origins and Effects of the High-Wage Doctrine and the Minimum Wageâ€. Journal of Labour Research, Springer, Vol. 20(4). pp. 447-462.
Vuillemey G. (2008) “The Economic Effects of the Minimum Wageâ€. IEM’s Economic Note, pp. 1-4.
WageIndicator Foundation (www.africapay.org), Accessed January 10, 2015.
Watanabe M. (2013) “Minimum Wage, Public Investment, Economic Growthâ€. Theoretical Economic Letters, 2013, 3. pp. 288-291.
World Bank (2014). World Development Indicators, Washington, DC: World Bank.
